Summer doesn’t officially start until June 20, but we got some unexpected heat from the latest U.S. jobs report, released Friday for the month of May. Below, I explain why you shouldn’t sweat the data. I also provide seven specific investment takeaways.

The U.S. Labor Department’s Bureau of Labor Statistics (BLS) reported Friday that the U.S. economy added far more jobs than expected in May. While consumers and the current administration might welcome this news, it presents a conundrum for inflation hawks and the stock market.

According to the BLS, nonfarm payrolls expanded by 272,000 for the month, up from 165,000 in April and well ahead of the consensus estimate for 190,000 (see chart).

At the same time, the unemployment rate rose to 4%, the first time it has punched through that level since January 2022. Economists had been expecting the rate to stay unchanged at 3.9% from April.

However, a deeper dive into the numbers shows underlying softness. The labor force participation rate decreased to 62.5%, down 0.2 percentage point. The survey of households used to calculate the unemployment rate revealed that the level of people who reported holding jobs fell by 408,000. Discouraged workers and those holding part-time jobs for economic reasons held steady at 7.4%.

The household survey also showed that full-time workers declined by 625,000, while those holding part-time positions increased by 286,000.

Expanding on recent trends, May’s job gains were concentrated in health care, government, and leisure and hospitality. These three sectors combined accounted for more than half the gains.

The Seven Takeaways

In light of the BLS reporting a much higher-than-expected increase in jobs for May, investors face a complex economic landscape. While the strong job growth indicates a resilient economy, the data also carries mixed signals that require careful navigation.

Friday’s jobs report reduces the Federal Reserve’s motivation to lower interest rates. The next meeting of the policy-making Federal Open Market Committee (FOMC) occurs June 11-12. The FOMC isn’t expected to cut rates until its meeting in September or perhaps as late as December.

The monetary pessimists are actually arguing that we won’t get a rate cut at all this year, an unlikely scenario that nonetheless gets more probable in the context of May’s hot jobs report.

Here’s how investors can approach trading in this context:

1. Diversify Portfolios: Given the robust job additions in health care, government, and leisure and hospitality, investors should consider diversifying their portfolios to include stocks in these sectors. These industries have shown resilience and growth potential, making them attractive even amid economic uncertainties.

2. Monitor Interest Rates: The unexpected job surge reduces the impetus for the Fed to lower interest rates, which can impact bond yields and interest-sensitive sectors. Investors should stay attuned to the outcomes of next week’s FOMC meeting. Elevated interest rates typically favor sectors such as financials, which benefit from higher borrowing costs.

3. Hedge Against Inflation: With inflation concerns persisting, it’s prudent to hedge against potential price increases. Commodities, real estate, and Treasury Inflation-Protected Securities (TIPS) can provide protection against inflation. Allocating a portion of your portfolio to these assets can mitigate the risk of eroding purchasing power.

4. Rotate into Consumer Staples and Utilities: These sectors tend to perform well in uncertain economic times due to their essential nature. Companies in these sectors often have stable revenues and dividends, offering a safer investment during potential market volatility. Utilities stocks in particular have been rebounding in recent months.

5. Watch for Volatility in Technology and Growth Stocks: Higher interest rates can lead to increased volatility in high-growth and technology stocks. These companies often rely on cheap borrowing to finance expansion. Mega-cap tech stocks have gotten pricey and they’re vulnerable to pullbacks. Consider trimming positions in these sectors or using options strategies to hedge against potential downturns.

6. Consider Value Stocks: Value stocks, which are typically undervalued relative to their fundamentals, offer attractive opportunities as the market reassesses growth prospects and grapples with interest rate uncertainty. The laggards of 2023 are poised to become the leaders of 2024.

7. Long-Term Perspective: While short-term market reactions can be volatile, maintaining a long-term perspective is essential. Investors should focus on fundamental strengths and long-term growth potential rather than being swayed by short-term market fluctuations. Don’t get whipsawed by news headlines.

I prefer to see the glass as half full: Despite lingering inflation fears and higher-for-longer interest rates, we should all be grateful for a strong economy.

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John Persinos is the editorial director of Investing Daily.

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This article previously appeared on Investing Daily.